U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2001
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[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from __________ to
_____________.
Commission file number 0-27282
ATLANTIC TECHNOLOGY VENTURES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 36-3898269
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
350 Fifth Avenue, Suite 5507, New York, New York 10118
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(Address of principal executive offices)
(212) 267-2503
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(Issuer's telephone number)
150 Broadway, Suite 1110, New York, New York 10038
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(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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Number of shares of common stock outstanding as of August 13, 2001: 7,131,480
Transitional Small Business Disclosure Format (check one): Yes No X
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INDEX
Page
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited)
as of June 30, 2001 (unaudited) and December 31, 2000 .................3
Consolidated Statements of Operations (unaudited)
for the six months ended June 30, 2001 and 2000,
and the period from July 13, 1993 (inception) to June 30, 2001 ........4
Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 2001 and 2000, and the
period from July 13, 1993 (inception) to June 30, 2001 ................5
Notes to Consolidated Financial Statements (unaudited) ................6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations .....................11
PART II -- OTHER INFORMATION
Item 5. Other Information ....................................................17
Item 6. Exhibits and Reports on Form 8-K .....................................17
SIGNATURES .......................................................................23
2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
Assets 2001 2000
------------ ------------
Current assets:
Cash and cash equivalents $ 1,030,363 2,663,583
Accounts receivable -- 192,997
Prepaid expenses 9,815 22,599
------------ ------------
Total current assets 1,040,178 2,879,179
Property and equipment, net 121,052 227,088
Investment in affiliate 45,660 67,344
Other assets 22,838 2,901
------------ ------------
Total assets $ 1,229,728 3,176,512
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 706,878 785,838
Deferred revenue -- 1,294,615
------------ ------------
Total current liabilities $ 706,878 2,080,453
Redeemable Series B convertible preferred stock
Authorized 1,647,312 shares; 0 and 206,898
shares issued and outstanding at June 30, 2001
and December 31, 2000 respectively -- 600,000
Stockholders' equity:
Preferred stock, $.001 par value. Authorized 10,000,000
shares; 1,375,000 shares designated as Series A
convertible preferred stock -- --
Series A convertible preferred stock, $.001 par value
Authorized 1,375,000 shares; 329,256 and 359,711
shares issued and outstanding at June 30, 2001 and
December 31, 2000, respectively (liquidation preference
aggregating $4,280,328 and $4,676,243 at June 30, 2001
and December 31, 2000, respectively) 329 360
Convertible preferred stock warrants, 112,896
issued and outstanding at June 30, 2001 and
December 31, 2000 520,263 520,263
Common stock, $.001 par value. Authorized 50,000,000
shares; 7,131,447 and 6,122,135 shares issued and
outstanding at June 30, 2001 and December 31, 2000,
respectively 7,131 6,122
Common stock subscribed. 182 shares at June 30, 2001
and December, 31, 2000 -- --
Additional paid-in capital 25,423,361 24,796,190
Deficit accumulated during development stage (25,427,692) (24,826,334)
------------ ------------
523,392 496,601
Less common stock subscriptions receivable (218) (218)
Less treasury stock, at cost (324) (324)
------------ ------------
Total stockholders' equity 522,850 496,059
------------ ------------
Total liabilities and stockholders' eq$ity 1,229,728 3,176,512
============ ============
See accompanying notes to unaudited consolidated financial statements.
3
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations
(Unaudited)
Three months ended June 30,
-------------------------------------------
2001 2000
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Revenues:
Development revenue $ -- $ 1,434,634
License revenue -- --
Grant revenue -- --
--------------- --------------
Total revenues -- 1,434,634
--------------- --------------
Costs and expenses:
Cost of development revenue -- 1,147,707
Research and development 295,316 302,029
Acquired in-process research and
development -- 2,390,023
General and administrative 1,155,325 621,836
Compensation expense relating to
stock warrants (general and administrative) 22,695 70,834
License fees -- --
--------------- --------------
Total operating expenses 1,473,336 4,532,429
--------------- --------------
Operating loss (1,473,336) (3,097,795)
Other (income) expense:
Interest and other income (14,334) (34,137)
(Gain) loss on sale of Optex assets 240,000 --
Loss on sale of Gemini assets 334,408 --
Interest expense -- --
Equity in (earnings) loss of affiliate 17,963 23,700
Distribution to minority shareholders 69,760 --
--------------- --------------
Total other (income) expense 647,797 (10,437)
--------------- --------------
Net loss $ (2,121,133) $ (3,087,358)
=============== ==============
Imputed convertible preferred stock
dividend -- --
Dividend paid upon repurchase of Series B -- --
Preferred stock dividend issued in
preferred shares -- --
--------------- --------------
Net loss applicable to common shares $ (2,121,133) $ (3,087,358)
=============== ==============
Net loss per common share:
Basic and diluted $ (0.32) $ (0.56)
=============== ==============
Weighted average shares of common
stock outstanding, basic and diluted: 6,608,751 5,503,803
=============== ==============
Six months ended June 30,
-------------------------------------------
2001 2000
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Revenues:
Development revenue $ 2,461,922 $ 2,347,115
License revenue -- --
Grant revenue 250,000 13,009
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Total revenues 2,711,922 2,360,124
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Costs and expenses:
Cost of development revenue 2,082,568 1,877,692
Research and development 602,083 429,468
Acquired in-process research and
development -- 2,390,023
General and administrative 1,837,273 1,117,514
Compensation expense relating to
stock warrants (general and administrative) 34,666 1,061,654
License fees -- --
------------- ----------------
Total operating expenses 4,556,590 6,876,351
------------- ----------------
Operating loss (1,844,668) (4,516,227)
Other (income) expense:
Interest and other income (34,352) (74,327)
(Gain) loss on sale of Optex assets (2,569,451) --
Loss on sale of Gemini assets 334,408 --
Interest expense -- --
Equity in (earnings) loss of affiliate 21,684 23,700
Distribution to minority shareholders 837,274 --
------------- ----------------
Total other (income) expense (1,410,437) (50,627)
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Net loss $ (434,231) $ (4,465,600)
============= ================
Imputed convertible preferred stock
dividend 600,000 --
Dividend paid upon repurchase of Series B 167,127 --
Preferred stock dividend issued in
preferred shares 64,144 659,319
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Net loss applicable to common shares $ (1,265,502) $ (5,124,919)
============= ================
Net loss per common share:
Basic and diluted $ (0.19) $ (0.98)
============= ================
Weighted average shares of common
stock outstanding, basic and diluted: 6,515,753 5,236,680
============= ================
Cumulative
period from
July 13, 1993
(inception) to
June 30,
---------------------
2001
-------------
Revenues:
Development revenue $ 8,713,720
License revenue 2,500,000
Grant revenue 616,659
-------------
Total revenues 11,830,379
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Costs and expenses:
Cost of development revenue 7,084,006
Research and development 10,106,993
Acquired in-process research and
development 2,653,382
General and administrative 17,740,499
Compensation expense relating to
stock warrants (general and administrative) 1,055,531
License fees 173,500
-------------
Total operating expenses 38,813,911
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Operating loss (26,983,532)
Other (income) expense:
Interest and other income (1,285,488)
(Gain) loss on sale of Optex assets (2,569,451)
Loss on sale of Gemini assets 334,408
Interest expense 625,575
Equity in (earnings) loss of affiliate 100,958
Distribution to minority shareholders 837,274
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Total other (income) expense (1,956,724)
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Net loss $ (25,026,808)
=============
Imputed convertible preferred stock
dividend 5,931,555
Dividend paid upon repurchase of Series B 400,884
Preferred stock dividend issued in
preferred shares 1,347,207
-------------
Net loss applicable to common shares $ (32,706,454)
=============
Net loss per common share:
Basic and diluted
Weighted average shares of common
stock outstanding, basic and diluted:
See accompanying notes to unaudited consolidated financial statements.
4
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)
Cumulative
period from
July 13, 1993
(inception) to
Six months ended June 30, June 30,
--------------------------------------------------
2001 2000 2001
---------------------------- -------------------
Cash flows from operating activities:
Net loss $ (434,231) (4,465,600) (25,026,808)
Adjustments to reconcile net loss to
net cash used in operating activities:
Acquired in-process research and development -- 1,800,000 1,800,000
Expense relating to issuance of warrants 444,000 -- 742,202
Expense relating to the issuance of options -- -- 81,952
Expense related to Channel merger -- -- 657,900
Change in equity of affiliate 21,684 23,700 100,958
Compensation expense relating to
stock options and warrants 34,666 1,061,654 1,263,576
Discount on notes payable - bridge financing -- -- 300,000
Depreciation 43,911 32,729 550,416
Gain on sale of Optex assets (2,569,451) -- (2,569,451)
Distribution to Optex minority shareholders 837,274 -- 837,274
Loss on sale of Gemini assets 334,408 -- 334,408
Loss on disposal of furniture and equipment -- -- 73,387
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 192,997 (484,524) --
(Increase) decrease in prepaid expenses 12,784 (20,185) (9,815)
Decrease in deferred revenue (1,294,615) -- --
Increase (decrease) in accrued expenses (706,118) (277) 79,720
Increase (decrease) in accrued interest -- -- 172,305
Increase in other assets (19,937) (2,901) (22,838)
----------- ----------- -----------
Net cash used in operating activities (3,102,628) (2,055,404) (20,634,814)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of furniture and equipment (101,834) (23,179) (914,915)
Investment in affiliate -- (109,977) (146,618)
Proceeds from sale of Optex assets 3,000,000 -- 3,000,000
Proceeds from sale of furniture and equipment -- -- 6,100
----------- ----------- -----------
Net cash provided by (used in) investing activities 2,898,166 (133,156) 1,944,567
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from exercise of warrants -- -- 5,500
Proceeds from exercise of stock options -- 321,040 397,098
Proceeds from issuance of demand notes payable -- -- 2,395,000
Repayment of demand notes payable -- -- (125,000)
Proceeds from the issuance of notes payable -
bridge financing -- -- 1,200,000
Proceeds from issuance of warrants -- -- 300,000
Repayment of notes payable - bridge financing -- -- (1,500,000)
Repurchase of common stock -- -- (324)
Preferred stock dividend paid (577) -- (895)
Proceeds from the issuance of common stock -- -- 7,547,548
Proceeds from issuance of convertible preferred stock -- -- 11,441,672
Repurchase of convertible preferred stock (617,067) -- (1,128,875)
Distribution to Optex minority shareholders (811,114) -- (811,114)
----------- ----------- -----------
Net cash provided (used in) by financing activities (1,428,758) 321,040 19,720,610
----------- ----------- -----------
Net decrease in cash and cash equivalents (1,633,220) (1,867,520) 1,030,363
Cash and cash equivalents at beginning of period 2,663,583 3,473,321 --
----------- ----------- -----------
Cash and cash equivalents at end of period $ 1,030,363 1,605,801 1,030,363
=========== =========== ===========
Supplemental disclosure of noncash financing activities:
Issuance of common stock in exchange for
common stock subscriptions $ -- -- 7,027
Conversion of demand notes payable and the related
accrued interest to common stock -- -- 2,442,304
Cashless exercise of preferred warrants -- 19,811 49,880
Conversion of preferred to common stock 409 289 2,835
Preferred stock dividend issued in shares 64,144 659,324 1,190,024
=========== =========== ===========
See accompanying notes to unaudited consolidated financial statements.
5
ATLANTIC TECHNOLOGY VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2001
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information Accordingly, the financial statements
do not include all information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements In the opinion of management, the accompanying financial statements
reflect all adjustments, consisting of only normal recurring adjustments,
considered necessary for fair presentation Interim operating results are not
necessarily indicative of results that may be expected for the year ending
December 31, 2001 or for any subsequent period These consolidated financial
statements should be read in conjunction with Atlantic Technology Ventures,
Inc., and Subsidiaries' ("Atlantic") Annual Report on Form 10-KSB/A as of and
for the year ended December 31, 2000.
(2) LIQUIDITY
Atlantic anticipates that their current liquid resources will be
sufficient to finance their anticipated needs for operating and capital
expenditures at their present level of operations for at least the next several
months. However, since Atlantic does not have significant fixed cash
commitments, Atlantic has the option of significantly cutting or delaying its
development activities as may be necessary. In addition, Atlantic will attempt
to generate additional capital through a combination of collaborative
agreements, strategic alliances and equity and debt financing However, Atlantic
can give no assurance that they will be able to obtain additional capital
through these sources or upon terms acceptable to them.
On May 7, 2001, Atlantic entered into a common stock purchase agreement
with Fusion Capital Fund II, LLC pursuant to which Fusion Capital agreed to
purchase up to $6.0 million of our common stock. This agreement replaced an
earlier common stock purchase agreement between Atlantic and Fusion Capital
dated March 16, 2001. Fusion's obligation to purchase Atlantic shares is subject
to certain conditions, including the effectiveness of a registration statement
covering the shares to be purchased. That registration statement was declared
effective on July 6, 2001. A material contingency that may affect Atlantic's
operating plans and ability to raise funds is its stock price If its stock price
remains at current levels, Atlantic will be limited in the amount of funds it
will be able to draw on under the Fusion Capital agreement. Atlantic's stock
price is currently below the floor price of $0.68 specified in the Fusion
Capital agreement and as a result Atlantic is currently unable to draw funds
pursuant to the Fusion Capital agreement. As the Fusion Capital agreement is
currently structured, Atlantic cannot guarantee that it will be able to draw on
any funds. See note 11 below and see liquidity discussion within "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(3) COMPUTATION OF NET LOSS PER COMMON SHARE
Basic net loss per common share is calculated by dividing net loss
applicable to common shares by the weighted-average number of common shares
outstanding for the period. Diluted net loss per common share is the same as
basic net loss per common share, as common equivalent shares from stock options,
stock warrants, stock subscriptions, and convertible preferred stock would have
an antidilutive effect because Atlantic incurred a net loss during each period
presented.
(4) RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 2001, Atlantic adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities--an amendment of SFAS No.
133" and SFAS No. 133, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities." SFAS No. 138 amends the accounting and reporting
standards of SFAS No. 133 for certain derivative instruments and certain hedging
activities SFAS No. 133 requires a company to recognize all derivative
instruments as assets and liabilities in its balance sheet and measure them at
fair value. The adoption of these statements did not
6
have a material impact on Atlantic's consolidated financial position, results of
operations or cash flows, as Atlantic is currently not party to any derivative
instruments.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires that all
business combinations be accounted for under a single method--the purchase
method. Use of the pooling-of-interests method no longer is permitted. SFAS 141
requires that the purchase method be used for business combinations initiated
after June 30, 2001. SFAS 142 requires that goodwill no longer be amortized to
earnings, but instead be reviewed for impairment. The amortization of goodwill
ceases upon adoption of the Statement, which for calendar year-end companies,
will be January 1, 2002. SFAS No. 142 has no financial impact on Atlantic as
Atlantic does not have any goodwill or intangible assets which resulted from any
previous business combinations.
(5) INCOME TAXES
Atlantic incurred a net loss for the three and six months ended June
30,2001. In addition, Atlantic does not expect to generated book income for the
year ended December 31, 2001; therefore, no income taxes have been reflected for
the six months ended June 30, 2001.
(6) PREFERRED STOCK DIVIDEND
On January 16, 2001, Atlantic's board of directors declared a
payment-in-kind dividend of 0.065 of a share of Series A convertible preferred
stock for each share of Series A preferred stock held as of the record date of
February 7, 2001. The estimated fair value of this dividend of $64,144 was
included in Atlantic's calculation of net loss per common share for the six
months ended June 30, 2001. The equivalent dividend for the six months ended
June 30, 2000 had an estimated fair value of $659,319 and is recorded in the
same manner.
On August 7, 2001, Atlantic's board of directors declared a
payment-in-kind dividend of 0.065 of a share of Series A preferred stock per
share of Series A preferred stock to the holders of shares of the Series A
preferred stock as of the record date of August 7, 2001.
(7) ISSUANCE OF STOCK WARRANTS
As more fully described in Note 9 to Atlantic's Annual Report on Form
10-KSB/A as of and for the year ended December 31, 2000, on January 4, 2000,
Atlantic entered into a financial advisory and consulting agreement with Joseph
Stevens & Company, Inc. pursuant to which Atlantic issued to Joseph Stevens &
Company, Inc. three warrants to purchase an aggregate of 450,000 shares of its
common stock. Atlantic recorded compensation expense relating to these stock
warrants in the amounts of $70,834 and $1,061,654 for the three- and six-month
periods ended June 30, 2000, respectively. No such compensation is required
subsequent to December 31, 2000.
On March 8, 2001, Atlantic entered into an agreement with The Investor
Relations Group, Inc. ("IRG") under which IRG will provide Atlantic investor
relations services. Pursuant to this agreement, Atlantic issued to Dian Griesel,
the principal of IRG, warrants to purchase 120,000 shares of its common stock at
an exercise price of $0.875 per share. These warrants will vest monthly in 5,000
share increments over a 24-month period. In addition, should Atlantic's stock
price reach $2.50, Atlantic will grant Dian Griesel an additional 50,000
warrants, and should Atlantic's stock price reach $5.00, Atlantic will grant
Dian Griesel a further 50,000 warrants. As a result, Atlantic recorded
compensation expense relating to these stock warrants of $22,695 and $34,666 in
the three- and six-month periods ended June 30, 2001, respectively, pursuant to
EITF Issue No. 96-18. Atlantic will remeasure the compensation expense at the
end of each reporting period until the final measurement date is reached 24
months after issuance.
Compensation for these warrants relates to investment banking and investor
relations services and represents a general and administrative expense.
(8) REDEEMABLE SERIES B PREFERRED SHARES
On September 28, 2000, pursuant to a convertible preferred stock and
warrants purchase agreement (the "Purchase Agreement") Atlantic issued to BH
Capital Investments, L.P. and Excalibur Limited Partnership
7
(together, the "Investors") for a purchase price of $2,000,000, 689,656 shares
of Atlantic's Series B convertible preferred stock and warrants to purchase
134,000 shares of Atlantic's common stock. Half of the shares of the Series B
preferred stock (344,828 shares) and warrants to purchase half of the shares of
common stock (67,000 shares) were held in escrow, along with half of the
purchase price.
On December 4, 2000, Atlantic and the Investors entered into a stock
repurchase agreement (the "Repurchase Agreement") pursuant to which Atlantic
repurchased from the investors a portion of the outstanding shares.
Pursuant to Atlantic's subsequent renegotiations with the Investors,
Atlantic was required, among other things, to redeem on March 28, 2002, all
outstanding shares of Series B preferred stock for (A) 125% of the original
issue price per share or (B) the market price of the shares of common stock into
which they are convertible, whichever is greater (the "Redemption Price").
Atlantic would have been able to at any time redeem all outstanding shares of
Series B preferred stock at the Redemption Price. As a result of the
renegotiations discussed in this paragraph, the Series B preferred stock was
considered redeemable and the remaining outstanding shares at December 31, 2000
were classified outside of permanent equity in the accompanying consolidated
balance sheet. At December 31, 2000, of the shares of Series B preferred stock
issued to the Investors, there were 206,898 shares outstanding at a carrying
amount of $2.90 per share.
Holders of shares of Atlantic's outstanding Series B preferred stock could
convert each share into shares of common stock without paying Atlantic any cash.
The conversion price per share of the Series B preferred stock was also amended
by the second amendment to the Purchase Agreement. The conversion price per
share of Series B preferred stock on any given day is the lower of (1) $1.00 or
(2) 90% of the average of the two lowest closing bid prices on the principal
market of the common stock out of the fifteen trading days immediately prior to
conversion. The change in conversion price upon the renegotiations on January 9,
2001 resulted in a difference between the conversion price of the Series B
preferred stock and the market price of the common stock on the effective date
of the renegotiation. This amount, estimated at $600,000, was recorded as an
imputed preferred stock dividend within equity and is deducted from net loss to
arrive at net loss applicable to common shares during the six months ended June
30, 2001.
On January 19, 2001, 41,380 shares of Series B preferred stock were
converted by the Investors into 236,422 shares of Atlantic's common stock. On
March 9, 2001, Atlantic and the Investors entered into a second stock repurchase
agreement pursuant to which Atlantic repurchased from the Investors, for an
aggregate purchase price of $617,067, all 165,518 shares of Atlantic's Series B
preferred stock held by the Investors on March 9, 2001. The carrying amount of
the 165,518 shares is equal to $480,000; therefore the amount in excess of the
carrying amount, which equals $167,127, was recorded as a dividend upon
repurchase of shares of Series B preferred stock and is deducted from net loss
to arrive at net loss applicable to common shares.
(9) DEVELOPMENT REVENUE
In accordance with an amended license and development agreement, which was
subsequently terminated as described below in note 10, Bausch & Lomb Surgical
reimbursed Atlantic's subsidiary, Optex Ophthalmologics, Inc. ("Optex"), for
costs Optex incurred in developing its Catarex technology, plus a profit
component. For the six months ended June 30, 2001, this agreement provided
$2,461,922 of development revenue, and related cost of development revenue of
$2,082,568. This agreement provided $1,434,634 and $2,347,115 of development
revenue, and related cost of development revenue of $1,147,707 and $1,877,692
for the three- and six-month periods ended June 30, 2000 respectively. The
agreement was terminated in March 2001 (see note 10 below). Accordingly, there
was no development revenue or related expense for the quarter ended June 30,
2001.
(10) SALE OF OPTEX ASSETS
Pursuant to an asset purchase agreement dated January 31, 2001, among
Bausch & Lomb, a Bausch & Lomb affiliate, Atlantic, and Optex, on March 2, 2001,
Optex sold to Bausch & Lomb substantially all of its assets (mostly intangible
assets with no book value), including all those related to the Catarex
technology. The purchase price was $3 million paid at closing (of which
approximately $564,000 has been distributed to Optex's minority shareholders).
In addition, Optex is entitled to receive additional consideration, namely $1
million once Bausch & Lomb receives regulatory approval to market the Catarex
device in Japan, royalties on net sales on the terms stated
8
in the original development agreement dated May 14, 1998, between Bausch & Lomb
and Optex, as amended, and minimum royalties of $90,000, $350,000, and $750,000
for the first, second, and third years, respectively, starting on first
commercial use of the Catarex device or January 1, 2004, whichever is earlier.
Optex also has the option to repurchase the acquired assets from Bausch & Lomb
at fair value if it ceases developing the Catarex technology at fair value.
Upon the sale of Optex assets, Bausch & Lomb's development agreement with
Optex was terminated and Optex has no further involvement with Bausch & Lomb. As
a result of this transaction, Atlantic recorded a net gain on the sale of Optex
assets of $2,569,451 for the six-month period ended June 30, 2001, net of
severance payments to former Optex employees in the amount of $240,000 made
during the three-month period ended June 30, 2001. The purchase price of
$3,000,000 is nonrefundable and upon the closing of the asset purchase agreement
in March 2001, Optex had no further obligation to Bausch & Lomb or with regard
to the assets sold. In the asset purchase agreement, Optex agreed to forgo
future contingent payments provided for in the earlier development agreement.
Pursuant to Atlantic's agreement with the minority shareholders of Optex, Optex
has recorded a profit distribution for the six months ended June 30, 2001 of
$837,274 representing the minority shareholders' percentage of the cumulative
profit from the Bausch & Lomb development and asset purchase agreements up to
and including proceeds from the sale of Optex' assets.
On May 9, 2001, Atlantic's board of directors, after consideration of all
the relevant facts and circumstances, including recommendation of counsel,
agreed to authorize an aggregate payment of $240,000 to three former employees
of Optex (who are now employed by Bausch & Lomb). The payments were made on May
11, 2001, and represented the settlement of claims made by the employees
subsequent to the asset purchase agreement referred to above for severance
monies allegedly due under their employment agreement. Atlantic did not believe
these monies were due pursuant to the terms of the transaction itself and the
respective employment agreements. The board of directors elected to acquiesce to
the demands of the former employees and resolve the matter in light of the
potential future royalties from Bausch & Lomb and the importance of these
individuals to the ongoing development activities. The payment was recorded as
an expense netted against the gain on sale of Optex assets in the June 30, 2001
statement of operations.
(11) PRIVATE PLACEMENT OF COMMON SHARES
On May 7, 2001, Atlantic entered into a common stock purchase agreement
with Fusion Capital Fund II, LLC, pursuant to which Fusion Capital agreed to
purchase up to $6.0 million of Atlantic's common stock over a 30-month period,
subject to a six-month extension or earlier termination at Atlantic's
discretion. This agreement replaced an earlier common stock purchase agreement
between Atlantic and Fusion Capital dated March 16, 2001. Fusion's obligation to
purchase Atlantic shares is subject to certain conditions, including the
effectiveness of a registration statement covering the shares to be purchased.
That registration statement was declared effective on July 6, 2001. The selling
price of the shares will be equal to the lesser of (1) $20.00 or (2) a price
based upon the future market price of the common stock, without any fixed
discount to the market price. A material contingency that may affect Atlantic's
operating plans and ability to raise funds is its stock price. If its stock
price remains at current levels, Atlantic will be limited in the amount of funds
it will be able to draw on under the Fusion Capital agreement. Atlantic's stock
price is currently below the floor price of $0.68 specified in the Fusion
Capital agreement, and as a result, Atlantic is currently unable to draw on
funds pursuant to the Fusion Capital agreement. As the Fusion Capital agreement
is currently structured, Atlantic cannot guarantee that it will be able to draw
on any funds. Atlantic paid a finder's fee of $120,000 in connection with
signing this agreement and subsequently was required to issue 600,000 commitment
shares to Fusion Capital; those shares had an estimated fair value of $444,000.
General and administrative expense for the three-and six-month periods ended
June 30, 2001 include amounts relating to the finder's fee and issuance of stock
in the amounts of $444,000 and $564,000 respectively.
(12) SALE OF GEMINI ASSETS
Pursuant to an asset purchase agreement dated April 23, 2001, among
Atlantic, Atlantic's majority-owned subsidiary Gemini Technologies, Inc., the
Cleveland Clinic Foundation ("CCF") and CCF's affiliate IFN, Inc., Gemini
undertook to sell, upon meeting certain closing conditions, to IFN substantially
all its assets, including all those related to the 2-5A antisense enhancing
technology, for future contingent royalty payments and withdrawal of CCF's
arbitration demand against Atlantic and Gemini. The transaction closed on May 5,
2001. This transaction will be beneficial to Atlantic since it permits Atlantic
to avoid terminating the Cleveland sublicense with no compensation to Gemini and
spares Atlantic from having to pay the substantial shutdown costs that Gemini
would
9
likely have incurred without this asset purchase agreement. In connection with
this sale, Atlantic recorded a loss of $334,408. This loss results from net
assets sold to IFN of $136,408 and a potential exposure, related to SBIR grant
funds for research on the 2-5A antisense technology, of approximately $198,000,
which was accrued for at June 30, 2001.
(13) SUBSEQUENT EVENTS
On August 9, 2001, Atlantic retained Proteus Capital Corp. as its
investment bankers to assist Atlantic with raising additional funds. Pursuant to
this agreement, Atlantic has agreed to issue to Proteus warrants to acquire
100,000 shares of its common stock at the average closing stock price for the
two weeks ending August 17, 2001. Beginning in the third quarter of 2001,
Atlantic will record compensation expense relating to the stock warrants
representing their estimated fair value. Atlantic will remeasure the
compensation expense at the end each reporting period until the final
measurement date is reached.
In August 2001, Atlantic issued 35,000 shares of its common stock to each
of BH Capital Investments, L.P. and Excalibur Limited Partnership in return for
their commitment to provide Atlantic with $3.5 million of financing in
connection with an asset purchase for which Atlantic had submitted a bid.
Atlantic did not ultimately purchase those assets.
10
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion of our results of operations and
financial condition in conjunction with our Annual Report on Form 10-KSB/A for
the year ended December 31, 2000. This discussion includes "forward-looking"
statements that reflect our current views with respect to future events and
financial performance. We use words such as we "expect," "anticipate,"
"believe," and "intend" and similar expressions to identify forward-looking
statements. Investors should be aware that actual results may differ materially
from our expressed expectations because of risks and uncertainties inherent in
future events, particularly those risks identified in the "Risk Factors" section
of the Annual Report on Form 10-KSB/A, and should not unduly rely on these
forward looking statements.
RESULTS OF OPERATIONS
THREE-MONTH PERIOD ENDED JUNE 30, 2001 VS. 2000
In accordance with a license and development agreement, as amended, Bausch
& Lomb Surgical has paid our subsidiary, Optex Ophthalmologics, Inc. ("Optex"),
for developing its Catarex technology. With the termination of this agreement at
the conclusion of the sale of substantially all of Optex's assets (mostly
intangible assets with no book value) in March 2001, as described further below,
we no longer have the revenues or profits associated with that agreement
available to us. As a result, for the three months ended June 30, 2001, this
agreement provided no development revenue, and no related cost of development
revenue. For the three months ended June 30, 2000, this agreement provided
$1,434,634 of development revenue, and related cost of development revenue of
$1,147,707.
For the quarter ended June 30, 2001, research and development expense was
$295,316 as compared to $302,029 in the second quarter of 2000. This decrease is
primarily due to the cessation of research and development activities on the
antisense technology as a result of the sale of the assets of Gemini, partially
offset by increased expenditures related to the testing of our CT-3 compound.
As of June 30, 2000, we made an investment in TeraComm, Inc. of $700,000
in cash and common stock and warrants valued at $1.8 million. For the quarter
ended June 30, 2000, we expensed $2,390,023 of this payment as acquired
in-process research and development since TeraComm's product development
activity was in its very early stages. As a result of TeraComm's not meeting a
technical milestone at December 31, 2000, no further investments were made in
TeraComm.
For the quarter ended June 30, 2001, general and administrative expense
was $1,155,325 as compared to $621,836 in the quarter ended June 30, 2000. This
increase is principally due to the estimated fair value of our issuing 600,000
commitment shares to Fusion Capital Fund II, LLC of $444,000 incurred during the
second quarter of 2001 in conjunction with a common stock purchase agreement
entered into during the second quarter of 2001 with Fusion Capital pursuant to
which Fusion Capital agreed to purchase up to $6.0 million of our common stock
over a 30-month period, subject to a 6-month extension or earlier termination at
our discretion. Fusion's obligation to purchase Atlantic shares is subject to
certain conditions, including the effectiveness of a registration statement
covering the shares to be purchased. That registration statement was declared
effective on July 6, 2001. A material contingency that may affect our operating
plans and ability to raise funds is our stock price. If our stock price remains
at current levels, we will be limited in the amount of funds we will be able to
draw on under the Fusion Capital agreement. Our stock price is currently below
the floor price of $0.68 specified in the Fusion Capital agreement and as a
result we are currently unable to draw funds pursuant to the Fusion Capital
agreement. As the Fusion Capital agreement is currently structured, we cannot
guarantee that we will be able to draw on any funds. See "Liquidity and Capital
Resources" for further details on this agreement. Also contributing to the
increase in general and administrative expenses was an increase in expenses
associated with investor relations services over last year of about $48,000.
For the quarter ended June 30, 2001, we had compensation expense relating
to stock warrants of $22,695 associated with warrants issued to Dian Griesel
during March 2001 as partial compensation for investor relations services.
Additional expense associated with these warrants will continue to be incurred
over the two-year term of the agreement. For the quarter ended June 30, 2000, we
had $70,834 of expense associated with warrants issued to Joseph Stevens &
Company as partial compensation for investment banking services which amount was
recorded in
11
full as of December 31, 2000. Compensation expense relating to these investor
relations and investment banking services represent a general and administrative
expense.
For the second quarter of 2001, interest and other income was $14,334,
compared to $34,137 in the second quarter of 2000. The decrease in interest
income is primarily due to the decline in our cash reserves.
Net loss applicable to common shares for the quarter ended June 30, 2001,
was $2,121,133 as compared to $3,087,358 for the quarter ended June 30, 2000.
This decrease in net loss applicable to common shares is primarily attributable
to the recording of acquired in-process research and development expense in
conjunction with our investment in TeraComm, Inc. of $2,390,023 in the second
quarter of 2000. The loss differential is partially reduced by a loss on the
sale of the assets of Gemini of $334,408 in the second quarter of 2001,
severance payments declared in May 2001 to former Optex employees aggregating to
$240,000, and the cost of our issuing 600,000 commitment shares to Fusion
Capital Fund II, LLC of $444,000 incurred in the second quarter of 2001. In
addition, with the termination of our agreement with Bausch & Lomb, we no longer
have the revenue or profits associated with that agreement available to us. As a
result, we had no profit resulting from this agreement in the second quarter of
2001 as compared with $286,927 in the second quarter of 2000. For the year ended
December 31, 2000, we received $5,169,288 in development revenue from Bausch &
Lomb.
SIX-MONTH PERIOD ENDED JUNE 30, 2001 VS. 2000
In accordance with a license and development agreement, as amended, Bausch
& Lomb Surgical has paid our subsidiary, Optex Ophthalmologics, Inc. ("Optex"),
for developing its Catarex technology. For the six months ended June 30, 2001,
this agreement provided $2,461,922 of development revenue and related cost of
development revenue of $2,082,568. For the six months ended June 30, 2000, this
agreement provided $2,347,115 of development revenue and related cost of
development revenue of $1,877,692. The increase in revenues and related expenses
over last year was due to the recognition of a project completion bonus of
$1,067,345 paid out and recognized at the completion of the project in March
2001. The increase is offset by the fact that there were no revenues and related
expenses in the second quarter of 2001. With the termination of the above
agreement at the conclusion of the sale of substantially all of Optex's assets
(mostly intangible assets with no book value) in March 2001, as described
further below, we will no longer have the revenues or profits associated with
that agreement available to us.
For the six months ended June 30, 2001, research and development expense
was $602,083 as compared to $429,468 in the six months ended June 30, 2000. This
increase is due to increased expenditures on certain development projects,
including CT-3, with respect to which we have been assessing potential markets
and developing test plans for a Phase II study. This increase is offset somewhat
by the cessation of research and development activities on the antisense
technology as a result of the sale of the assets of Gemini.
As of June 30, 2000, we made an investment in TeraComm, Inc. of $700,000
in cash and common stock and warrants valued at $1.8 million. For the six months
ended June 30, 2000, we expensed $2,390,023 of this payment as acquired
in-process research and development since TeraComm's product development
activity was in its very early stages. As a result of TeraComm's not meeting a
technical milestone at December 31, 2000, no further investments were made in
TeraComm.
For the six months ended June 30, 2001, general and administrative expense
was $1,837,273 as compared to $1,117,514 for the six months ended June 30, 2000.
This increase is largely due to an increase in payroll costs over last year of
approximately $90,000, an increase in expenses associated with investor
relations services of approximately $65,000 and expenses incurred in conjunction
with a common stock purchase agreement entered into during the second quarter of
2001 with Fusion Capital Fund II, LLC. These expenses include the cost of our
issuing 600,000 commitment shares to Fusion Capital of $444,000 and a finders
fee of $120,000. Fusion's obligation to purchase Atlantic shares is subject to
certain conditions, including the effectiveness of a registration statement
covering the shares to be purchased. That registration statement was declared
effective on July 6, 2001. A material contingency that may affect our operating
plans and ability to raise funds is our stock price. If our stock price remains
at current levels, we will be limited in the amount of funds we will be able to
draw on under the Fusion Capital agreement. At this point our stock price is
currently below the floor price of $0.68 specified in the Fusion Capital
agreement and as a result we are currently unable to draw funds pursuant to the
Fusion Capital agreement. As the Fusion Capital
12
agreement is currently structured, we cannot guarantee that we will be able to
draw on any funds. See "Liquidity and Capital Resources" for further details on
this agreement.
For the six months ended June 30, 2001, we had compensation expense
relating to stock warrants of $34,666 associated with warrants issued to Dian
Griesel during March 2001 as partial compensation for investor relations
services. Additional expense associated with these warrants will continue to be
incurred over the two-year term of the agreement. For the six months ended June
30, 2000, we had $1,061,654 of expense associated with warrants issued to Joseph
Stevens & Company as partial compensation for investment banking services, which
amount was recorded in full as of December 31, 2000. Compensation expense
relating to these investor relations and investment banking services represent a
general and administrative expense.
For the six months ended 2001, interest and other income was $34,352,
compared to $74,327 in six months ended June 30, 2000. The decrease in interest
income is primarily due to the decline in our cash reserves.
Net loss applicable to common shares for the six months ended June 30,
2001, was $1,265,502 as compared to $5,124,919 for the six months ended June 30,
2000. This decrease in net loss applicable to common shares is attributable in
part to a gain on the sale of the assets of our subsidiary, Optex, recognized
during the six months ended June 30, 2001 in the amount of $2,569,451, partially
offset by a distribution to the minority shareholders of Optex of $837,274 (see
further discussion of this sale below). In addition, the decrease in net loss
applicable to common shares is compounded by the recording of acquired
in-process research and development expense in conjunction with our investment
in TeraComm, Inc. of $2,390,023 in the six months ended June 30, 2000. In the
six months ended June 30, 2000, we recorded compensation expense of $1,061,654
relating to stock warrants issued to Joseph Stevens & Co. compared with
compensation expense of $34,666 relating to stock warrants issued to the
Investor Relations Group during the current year. The loss differential is
partially reduced by a loss on the sale of the assets of Gemini of $334,408 in
the six months ended June 30, 2001, severance payments declared in May 2001 to
former Optex employees aggregating to $240,000, and the cost of our issuing
600,000 commitment shares to Fusion Capital Fund II, LLC of $444,000 incurred in
the six months ended June 30, 2001. In addition, with the termination of our
agreement with Bausch & Lomb, we no longer have the revenue or profits
associated with that agreement available to us. As a result, we had no profit
resulting from this agreement in the second quarter of 2001 as compared with
$286,927 in the second quarter of 2000. For the year ended December 31, 2000, we
received $5,169,288 in development revenue from Bausch & Lomb.
Net loss applicable to common shares for the six months ended June 30,
2001 also included a beneficial conversion on share of our Series B preferred
stock in the amount of $600,000 and a dividend of $167,127 paid upon the
repurchase of the outstanding shares of Series B preferred stock recorded during
the six months ended June 30, 2001. We also issued preferred stock dividends on
our Series A preferred stock for which the estimated fair value of $64,144 and
$659,319 was included in the net loss applicable to common shares for the six
months ended June 30, 2001 and 2000, respectively. The decrease in the estimated
fair value of these dividends as compared to the prior year is primarily a
reflection of the decline in our stock price and a reduction of the number of
preferred shares issued.
LIQUIDITY AND CAPITAL RESOURCES
From inception to June 30, 2001, we incurred an accumulated deficit of
$25,427,692, and we expect to continue to incur additional losses through the
year ending December 31, 2001 and for the foreseeable future. The loss has been
incurred through primarily research and development activities related to the
various technologies under our control.
Pursuant to an asset purchase agreement dated January 31, 2001, among
Bausch & Lomb, a Bausch & Lomb affiliate, Atlantic, and Optex, on March 2, 2001,
Optex sold to Bausch & Lomb substantially all its assets (mostly intangible
assets with no book value), including all those related to the Catarex
technology. Upon the sale, Atlantic and Optex have no further obligations to
Bausch & Lomb. The purchase price was $3 million paid at closing (approximately
$564,000 of which was distributed to the minority shareholders). In addition,
Optex is entitled to receive additional consideration, namely $1 million once
Bausch & Lomb receives regulatory approval to market the Catarex device in
Japan, royalties on net sales on the terms stated in the original development
agreement dated May 14, 1998, between Bausch & Lomb and Optex, as amended, and
minimum royalties of $90,000, $350,000, and $750,000 for the first, second, and
third years, respectively, starting on first commercial use of the
13
Catarex device or January 1, 2004, whichever is earlier. Optex also has the
option to repurchase the acquired assets from Bausch & Lomb if it ceases
developing the Catarex technology at fair value. Upon the sale of Optex assets,
Bausch & Lomb's development agreement with Optex was terminated. In the asset
purchase agreement Optex agreed to forgo future contingent payments provided for
in the earlier development agreement. As a result of this transaction, we
recorded a gain on the sale of Optex assets of $2,569,451. We made a profit
distribution of $837,274 to Optex's minority shareholders, representing their
share of the cumulative profit from the development agreement with Bausch & Lomb
and the proceeds from the sale of Optex' assets.
On September 28, 2000, pursuant to a convertible preferred stock and
warrants purchase agreement (the "Purchase Agreement"), we issued to BH Capital
Investments, L.P. and Excalibur Limited Partnership (together, the "Investors")
for a purchase price of $2,000,000, 689,656 shares of our Series B convertible
preferred stock and warrants to purchase 134,000 shares of our common stock.
Half of the shares of Series B preferred stock (344,828 shares) and warrants to
purchase half of the shares of common stock (67,000 shares) were held in escrow,
along with half of the purchase price.
On December 4, 2000, Atlantic and the Investors entered into a stock
repurchase agreement (the stock Repurchase Agreement") pursuant to which we
repurchased from the Investors for $500,000 137,930 shares of Series B preferred
stock, and agreed to the release from escrow to the Investors of the $1,000,000
purchase price of the 344,828 shares of Series B preferred stock held in escrow.
We also allowed the Investors to keep all of the warrants issued under the
purchase agreement and issued to the Investors warrants to purchase a further
20,000 shares of our common stock at the same exercise price. On January 19,
2001, 41,380 shares of Series B preferred stock were converted by the Investors
into 236,422 shares of our common stock. On March 9, 2001, Atlantic and the
Investors entered into a second stock repurchase agreement pursuant to which we
repurchased from the Investors, for an aggregate purchase price of $617,067, all
165,518 shares of our Series B preferred stock held by the Investors. The
repurchase price represented 125% of the purchase price originally paid by the
investors for the repurchased shares, as well as an amount equal to the annual
dividend on the Series B preferred stock at a rate per share of 8% of the
original purchase price. The repurchased shares constitute all remaining
outstanding shares of Series B preferred stock; we have cancelled those shares.
On May 7, 2001, we entered into a common stock purchase agreement with
Fusion Capital Fund II, LLC pursuant to which Fusion Capital agreed to purchase
up to $6.0 million of our common stock over a 30-month period, subject to a
6-month extension or earlier termination at our discretion. This agreement
replaced an earlier common stock purchase agreement between Atlantic and Fusion
Capital dated March 16, 2001. Fusion's obligation to purchase Atlantic shares is
subject to certain conditions, including the effectiveness of a registration
statement covering the shares to be purchased. That registration statement was
declared effective on July 6, 2001. The selling price of the shares will be
equal to the lesser of (1) $20.00 or (2) a price based upon the future market
price of the common stock, without any fixed discount to the market price. A
material contingency that may affect our operating plans and ability to raise
funds is our stock price. If our stock price remains at current levels, we will
be limited in the amount of funds we will be able to draw on under the Fusion
Capital agreement. As the Fusion Capital agreement is currently structured, we
cannot guarantee that we will be able to draw on any funds. We paid a $120,000
finder's fee relating to this transaction to Gardner Resources, Ltd. and issued
to Fusion Capital Fund II, LLC 600,000 common shares as a commitment fee. Those
shares had an estimated fair value of $444,000. We have amended our agreement
with Fusion Capital to allow Atlantic to draw funds pursuant to the agreement
regardless of its listing status on the Nasdaq SmallCap Market.
Our available working capital and capital requirements will depend upon
numerous factors, including progress of our research and development programs;
our progress in and the cost of ongoing and planned preclinical and clinical
testing; the timing and cost of obtaining regulatory approvals; the cost of
filing, prosecuting, defending, and enforcing patent claims and other
intellectual property rights; competing technological and market developments;
changes in our existing collaborative and licensing relationships; the resources
that we devote to developing manufacturing and commercializing capabilities;
technological advances; the status of our competitors; our ability to establish
collaborative arrangements with other organizations; and our need to purchase
additional capital equipment.
At June 30, 2001, we had $1,030,363 in cash and cash equivalents and
working capital of $333,300. We anticipate that our current resources will be
sufficient to finance our anticipated needs for operating and capital
expenditures at our present level of operations for at least the next several
months. In addition, we will attempt to
14
generate additional capital through a combination of collaborative agreements,
strategic alliances, and equity and debt financing. However, we can give no
assurance that we will be able to obtain additional capital through these
sources or upon terms acceptable to us.
We have the following short term and long term liquidity needs. Our cash
utilized for operations for the next year is expected to be approximately
$200,000 per month. Currently, these expected operating expenses include
approximately $70,000 per month for research and preclinical development
expenses and approximately $130,000 for general and administrative expenses.
Based on our cash position of $1,030,363 at June 30, 2001, we will either have
to raise additional funds within the next few months to fund our current
spending requirements or we will have to reduce or eliminate the planned levels
of development activities. Since we do not have significant fixed cash
commitments, we have the option of significantly cutting or delaying our
development activities as may be necessary. A material contingency that may
affect our operating plans and ability to raise funds is our stock price. If our
stock price remains at current levels, we will be limited in the amount of funds
we will be able to draw on under the Fusion Capital agreement. Our stock price
is currently below the floor price of $0.68 and as a result we are currently
unable to draw funds pursuant to the Fusion Capital agreement. If our stock
price rises above $0.68, we will be able to begin drawing funds in the amount of
up to $200,000 per month from Fusion Capital, subject to certain conditions. As
the Fusion Capital agreement is currently structured, we cannot guarantee that
we will be able to draw on any funds. If we are unable to draw funds from Fusion
Capital, we will seek alternative funding sources. These funding sources include
seeking other equity financing and working toward licensing CT-3 later in 2001.
On August 9, 2001, we retained Proteus Capital Corp. as our investment
bankers to assist us with raising additional funds.
We are at risk of being delisted from the Nasdaq SmallCap Market. As of
March 20, 2001, we had the thirtieth consecutive business day that the minimum
bid price of our common stock was less than $1.00. This constitutes a failure on
our part to meet Nasdaq's continued inclusion requirement for minimum bid price.
On March 22, 2001, Nasdaq notified us of this failure, and we had a period of 90
calendar days from that notice to comply with the continued inclusion standard
for minimum bid price. Our common stock's minimum bid price has remained below
$1.00. On August 9, 2001, we had a hearing with Nasdaq's Listing Qualifications
Panel at which it was determined that our stock would be delisted subsequently
on an unspecified date. Shares of our stock would still be able to be traded on
the bulletin board. This could materially and adversely affect our ability to
raise additional funding.
RESEARCH AND DEVELOPMENT ACTIVITIES
Optex and the Catarex(TM) Technology
Our majority-owned (81.2%) subsidiary, Optex, is entitled to royalties and
other revenues in connection with commercialization of the Catarex technology.
Bausch & Lomb, a multinational ophthalmics company, is developing this
technology to overcome the limitations and deficiencies of traditional cataract
extraction techniques. Optex had been the owner of this technology and was
developing it pursuant to a development agreement with Bausch & Lomb, but on
March 2, 2001, Optex sold to Bausch & Lomb substantially all of its assets
(mostly intangible assets with no book value), including those related to the
Catarex technology.
Bausch & Lomb, which has committed over $15 million on the project to
date, has assumed full responsibility for development and marketing of the
technology, and will pay Optex royalties on sales of the device and associated
system. Bausch and Lomb has informed us that it expects to begin human clinical
trials of the device in the third quarter of 2001 at a variety of investigation
sites, and that it is working to develop the next-generation handpiece in order
to integrate the Catarex device with its Millenium Surgical platform.
CT-3 Anti-inflammatory/Analgesic Compound
We are developing our proprietary compound CT-3, a patented synthetic
derivative of carboxylic tetrahydrocannabinol (THC-7C), as an alternative to
nonsteroidal anti-inflammatory drugs, or "NSAIDs," such as aspirin and
ibuprofen. Over 130 million Americans suffer from chronic pain and 40 million
suffer from arthritis, and worldwide prescription sales of
analgesic/anti-inflammatory drugs exceeded $9 billion in 1999. Preliminary
studies
15
have shown that CT-3 demonstrates analgesic/anti-inflammatory properties at
microgram doses without central nervous system or gastrointestinal side effects
and also reduces joint damage caused by rheumatoid arthritis.
Since CT-3 appears to possess a wide range of therapeutic activity, we are
carefully choosing an indication that we feel CT-3 would be most efficacious for
and one that will strategically allow us to increase the licensing value of CT-3
in the most timely and cost effective manner. We are continuing our efforts by
conducting additional preclinical tests to study the analgesic activity of CT-3,
particularly with reference to neuropathic pain. We are planning to initiate
shortly a Phase I/II clinical trial of safety, tolerability, and efficacy to
determine the upper limits of safe dosing with CT-3 and to measure the potential
for CT-3 to act as a pain reliever in patients with neuropathic pain. In
addition, we have recently initiated a development plan for CT-3 to test its
efficacy in multiple sclerosis. We are currently testing these assumptions by
conducting preliminary studies in animal models predictive of efficacy in
humans. We are also preparing to conduct Phase II clinical trials to evaluate
the efficacy of CT-3 in multiple sclerosis-associated tremors and spasticity.
We are continuing to develop CT-3 for use in the treatment of a variety of
indications. After completion of the Phase I clinical trial we increased our
efforts to sublicense CT-3, to suitable strategic partners to assist in clinical
development, regulatory approval filing, manufacturing and marketing of CT-3.
Gemini and the 2-5A Antisense Technology
CryoComm(TM) Ultra High Speed Superconducting Electronics for Fiber-Optic Data
Transport and Routing
On May 1, 2001, we announced that we are expanding our involvement in
superconducting electronics technology by launching a new wholly-owned
subsidiary, CryoComm, Inc. CryoComm is currently the only company developing
terabit superconducting electronics for Internet packet switching and transport
products to sustain future growth of the Internet. This technology will solve a
major problem for large carriers: how to increase network capacity and remain
profitable. The benefits of this technology include quality of service, traffic
grooming, real-time provisioning and software-defined functionality that cannot
be realized in conventional fiber-optic network switches. And such a system
could be smaller, consume less power, use less fiber bandwidth, and cost less
than semiconductor switches having the same capacity.
CryoComm is currently developing and identifying all the elements for the
demonstration of an ultrafast fiber-optic packet switch based in superconducting
electronics. In particular, the company has a design for the superconducting
chip that will be at the core of the demonstration. CryoComm is now seeking a
directed investment of $5 million from private funding sources to demonstrate
320 gigabit per second switch capacity in a single chip in year 2002. The
company has presented this plan to major global long-haul telecommunications
carriers, and their responses have been uniformly positive and they have
encouraged the company to proceed with this development.
16
PART II -- OTHER INFORMATION
Item 5. Other Information
Risk of Delisting
We are at risk of being delisted from the Nasdaq SmallCap Market.
As of March 20, 2001, the minimum bid price of our common stock had been
less than $1.00 for 30 consecutive business days. This constituted a failure on
our part to meet Nasdaq's continued inclusion requirement for minimum bid price.
On March 22, 2001, Nasdaq notified us of this failure, and we had a period
of 90 calendar days from that notice to comply with the continued inclusion
standard for minimum bid price. To do so, we would have had to meet that
standard for a minimum of 10 consecutive business days during the 90-day
compliance period. We failed to do so, and on June 21, 2001, Nasdaq notified us
that we would be delisted on June 29, 2001, unless by June 28, 2001, we request
a hearing before Nasdaq's Listing Qualifications Panel.
On June 28, 2001, we requested a hearing, and that hearing was held on
August 9, 2001. The delisting of our common stock has been stayed pending the
Panel's decision. At the hearing, we requested, based on our particular
circumstances, an extension of the time allotted to raise our share price. There
can be no assurance the Panel will grant our request.
Item 6: Exhibits and Reports on Form 8-K
Exhibits
The following documents are referenced or included in this report.
Exhibit No. Description
3.1(1) Certificate of incorporation of Atlantic, as amended to date.
3.2(1) Bylaws of Atlantic, as amended to date.
3.3(5) Certificate of designations of Series A Convertible Preferred
Stock.
3.4(6) Certificate of increase of Series A Convertible Preferred Stock.
3.5(9) Certificate of designations, preferences and rights of Series B
convertible preferred stock of Atlantic, filed on September 28,
2000.
3. 6(9) Certificate of amendment of the certificate of designations,
preferences and rights of Series B convertible preferred stock of
Atlantic, filed on November 17, 2000.
3.7(10) Certificate of amendment of the certificate of designations,
preferences and rights of Series B convertible preferred stock of
Atlantic, filed on January 9, 2001.
3.8(10) Certificate of amendment of the certificate of designations,
preferences and rights of Series B convertible preferred stock of
Atlantic, filed on January 19, 2001.
4.2(1) Form of unit certificate.
4.3(1) Specimen common stock certificate.
4.4(1) Form of redeemable warrant certificate.
17
4.5(1) Form of redeemable warrant agreement by and between Atlantic and
Continental Stock Transfer & Trust Company.
4.6(1) Form of underwriter's warrant certificate.
4.7(1) Form of underwriter's warrant agreement by and between Atlantic
and Joseph Stevens & Company, L.P.
4.8(1) Form of subscription agreement by and between Atlantic and the
Selling Stockholders.
4.9(1) Form of bridge note.
4.10(1) Form of bridge warrant.
4.11(2) Investors' rights agreement by and among Atlantic, Dreyfus Growth
and Value Funds, Inc. and Premier Strategic Growth Fund.
4.12(2) Common stock purchase agreement by and among Atlantic, Dreyfus
Growth and Value Funds, Inc. and Premier Strategic Growth Fund.
10.2(1) Employment agreement dated July 7, 1995, between Atlantic and Jon
D. Lindjord.
10.3(1) Employment agreement dated September 21, 1995, between Atlantic
and Dr. Stephen R. Miller.
10.4(1) Employment agreement dated September 21, 1995, between Atlantic
and Margaret A. Schalk.
10.5(1) Letter agreement dated August 31, 1995, between Atlantic and Dr.
H. Lawrence Shaw.
10.6(1) Consulting agreement dated January 1, 1994, between Atlantic and
John K. A. Prendergast.
10.8(1) Investors' Rights agreement dated July 1995, between Atlantic,
Dr. Lindsay A. Rosenwald and VentureTek, L.P.
10.9(1) License and assignment agreement dated March 25, 1994, between
Optex Ophthalmologics, Inc., certain inventors and NeoMedix
Corporation, as amended.
10.10(1) License agreement dated May 5, 1994, between Gemini Gene
Therapies, Inc. and the Cleveland Clinic Foundation.
10.11(1)+ License agreement dated June 16, 1994, between Channel
Therapeutics, Inc., the University of Pennsylvania and certain
inventors, as amended.
10.12(1)+ License agreement dated March 28, 1994, between Channel
Therapeutics, Inc. and Dr. Sumner Burstein.
10.13(1) Form of financial advisory and consulting agreement by and between
Atlantic and Joseph Stevens & Company, L.P.
10.14(1) Employment agreement dated November 3, 1995, between Atlantic and
Shimshon Mizrachi.
10.15(3) Financial advisory agreement between Atlantic and Paramount dated
September 4, 1996 (effective date of April 15, 1996).
10.16(3) Financial agreement between Atlantic, Paramount and UI USA dated
June 23, 1996.
10.17(3) Consultancy agreement between Atlantic and Dr. Yuichi Iwaki dated
July 31, 1996.
18
10.18(3) 1995 stock option plan, as amended.
10.19(3) Warrant issued to an employee of Paramount Capital, LLC to purchase
25,000 shares of Common Stock of Atlantic.
10.20(3) Warrant issued to an employee of Paramount Capital, LLC to purchase
25,000 shares of Common Stock of Atlantic.
10.21(3) Warrant issued to an employee of Paramount Capital, LLC to purchase
12,500 shares of Common Stock of Atlantic.
10.22(4) Letter agreement between Atlantic and Paramount Capital, Inc.
dated February 26,1997.
10.23(4) agreement and plan of reorganization by and among Atlantic,
Channel Therapeutics, Inc. and New Channel, Inc. dated February
20, 1997.
10.24(4) Warrant issued to John Prendergast to purchase 37,500 shares of
Atlantic's Common Stock.
10.25(4) Warrant issued to Dian Griesel to purchase 24,000 shares of
Atlantic's Common Stock.
10.26(7) Amendment No. 1 to development & license agreement by and between
Optex and Bausch & Lomb Surgical, Inc. dated September 16, 1999.
10.27(8) Financial advisory and consulting agreement by and between
Atlantic and Joseph Stevens & Company, Inc. dated January 4, 2000.
10.28(8) Warrant No. 1 issued to Joseph Stevens & Company, Inc. to
purchase 150,000 shares of Atlantic's Common Stock exercisable
January 4, 2000.
10.29(8) Warrant No. 2 issued to Joseph Stevens & Company, Inc. to
purchase 150,000 shares of Atlantic's Common Stock exercisable
January 4, 2001.
10.30(8) Warrant No. 3 issued to Joseph Stevens & Company, Inc. to
purchase 150,000 shares of Atlantic's Common Stock exercisable
January 4, 2002.
10.31(9) Preferred stock purchase agreement dated May 12, 2000, between
Atlantic and TeraComm Research, Inc.
10.32(9) Warrant certificate issued May 12, 2000, by Atlantic to TeraComm
Research, Inc.
10.33(9) Stockholders agreement dated May 12, 2000, among TeraComm
Research, Inc., the common stockholders of TeraComm, and Atlantic.
10.34(9) Registration rights agreement dated May 12, 2000, between Atlantic
and TeraComm Research, Inc. with respect to shares of TeraComm
preferred stock issued to Atlantic.
10.35(9) Registration rights agreement dated May 12, 2000, between Atlantic
and TeraComm Research, Inc. with respect to shares of Atlantic
common stock issued to TeraComm.
10.36(9) Employment agreement dated as of April 10, 2000, between Atlantic
and A. Joseph Rudick.
10.37(9) Employment agreement dated as of April 3, 2000, between Atlantic
and Frederic P. Zotos.
10.38(9) Employment agreement dated as of April 10, 2000, between Atlantic
and Nicholas J. Rossettos, as amended.
10.39(9) Employment agreement dated as of May 15, 2000, between Atlantic and
Walter Glomb.
19
10.40(9) Employment agreement dated as of April 18, 2000, between Atlantic
and Kelly Harris.
10.41(10) Amendment dated as of July 18, 2000, to the Preferred Stock Purchase
agreement dated May 12, 2000, between Atlantic and TeraComm
Research, Inc.
10.42(10) Convertible preferred stock and warrants purchase agreement dated
September 28, 2000, among Atlantic, BH Capital Investments, L.P.
and Excalibur Limited Partnership.
10.43(10) Registration rights agreement dated September 28, 2000, among
Atlantic, BH Capital Investments, L.P., and Excalibur Limited
Partnership.
10.44(10) Escrow agreement dated September 28, 2000, among Atlantic, BH
Capital Investments, L.P., and Excalibur Limited Partnership.
10.45(10) Form of stock purchase warrants issued on September 28, 2000, to
BH Capital Investments, L.P., exercisable for shares of common
stock of Atlantic.
10.46(10) Form of stock purchase warrants issued on September 28, 2000, to
Excalibur Limited Partnership, exercisable for shares of common
stock of Atlantic.
10.47(10) Amendment No. 1 dated October 31, 2000, to convertible preferred
stock and warrants purchase agreement dated September 28, 2000,
among Atlantic, BH Capital Investments, L.P., and Excalibur
Limited Partnership.
10.48(12) Stock repurchase agreement dated December 4, 2000, among
Atlantic, BH Capital Investments, L.P., and Excalibur Limited
Partnership.
10.49(14) Letter agreement dated December 28, 2000, among Atlantic and BH
Capital Investments, L.P., and Excalibur Limited Partnership.
10.50(11) Amendment No. 2 dated January 9, 2001, to convertible preferred
stock and warrants purchase agreement dated September 28, 2000,
among Atlantic, BH Capital Investments, L.P., and Excalibur
Limited Partnership.
10.51(14) Amendment No. 1 dated January 9, 2001, to registration rights
agreement dated September 28, 2000, among Atlantic and BH Capital
Investments, L.P. and Excalibur Limited Partnership.
10.52(11) Amendment No. 3 dated January 19, 2001, to convertible preferred
stock and warrants purchase agreement dated September 28, 2000,
among Atlantic, BH Capital Investments, L.P., and Excalibur
Limited Partnership.
10.53(14) Letter agreement dated January 25, 2001, among Atlantic and BH
Capital Investments, L.P., and Excalibur Limited Partnership.
10.54(13) Stock repurchase agreement No. 2 dated March 9, 2001, among
Atlantic, BH Capital Investments, L.P., and Excalibur Limited
Partnership.
10.55(15) Common stock purchase agreement dated March 16, 2001, between
Atlantic and Fusion Capital Fund II, LLC.
10.56(15) Warrant certificate issued March 8, 2001 by Atlantic to Dian
Griesel.
10.57(16) Common stock purchase agreement dated as of May 7, 2001, between
Atlantic and Fusion Capital Fund II, LLC.
10.58(16) Form of registration rights agreement between Atlantic and Fusion
Capital Fund II, LLC.
20
10.59* Asset purchase agreement dated as of April 23, 2001, between
Atlantic, Gemini Technologies, Inc., and IFN, Inc.
21.1(1) Subsidiaries of Atlantic.
------
+ Confidential treatment has been granted as to certain portions of
these exhibits.
* Filed herewith.
(1) Incorporated by reference to exhibits of Atlantic's registration
statement on Form SB-2, Registration #33-98478, as filed with the
Securities and Exchange Commission (the "SEC") on October 24,
1995 and as amended by Amendment No. 1, Amendment No. 2,
Amendment No.3, Amendment No. 4 and Amendment No. 5, as filed
with the SEC on November 9, 1995, December 5, 1995, December 12,
1995, December 13, 1995 and December 14, 1995, respectively.
(2) Incorporated by reference to exhibits of Atlantic's Current Report
on Form 8-K, as filed with the SEC on August 30, 1996.
(3) Incorporated by reference to exhibits of Atlantic's Form 10-QSB
for the period ended September 30, 1996.
(4) Incorporated by reference to exhibits of Atlantic's Form 10-QSB
for the period ended March 31, 1996.
(5) Incorporated by reference to exhibits of Atlantic's Current Report
on Form 8-KSB, as filed with the SEC on June 9, 1997.
(6) Incorporated by reference to exhibits of Atlantic's Registration
Statement on Form S-3 (Registration No. 333-34379), as filed with
the Commission on August 26, 1997, and as amended by Amendment
No. 1 as filed with the SEC on August 28, 1997.
(7) Incorporated by reference to exhibits of Atlantic Form 10-QSB for
the period ended September 30, 1999.
(8) Incorporated by reference to exhibits of Atlantic's Form 10-KSB
for the period ended December 31, 1999.
(9) Incorporated by reference to exhibits of Atlantic's Form 10-QSB
for the period ended June 30, 2000.
(10) Incorporated by reference to exhibits of Atlantic's Form 10-QSB
for the period ended September 30, 2000.
(11) Incorporated by reference to exhibits of Atlantic's Form 8-K
filed on January 24, 2001.
(12) Incorporated by reference to exhibits of Atlantic's Form 8-K
filed on December 11, 2000.
(13) Incorporated by reference to exhibits of Atlantic's Form 8-K
filed on March 14, 2001.
(14) Incorporated by reference to exhibits of Atlantic's Form 10-KSB
filed on April 17, 2001.
(15) Incorporated by reference to exhibits of Atlantic's Form 10-QSB
for the period ended March 31, 2001.
21
(6) Incorporated by reference to exhibits of Atlantic's Registration
Statement on Form SB-2 (Registration No. 333-61974), as filed
with the Commission on May 31, 2001, and as amended by Amendment
No. 1 as filed with the SEC on June 29, 2001.
Reports on Form 8-K
On May 16, 2001, Atlantic filed with the SEC a Current Report on Form 8-K
stating that on May 4, 2001, there occurred the closing of the sale by Gemini
Technologies, Inc., an 85%-owned subsidiary of Atlantic, to IFN, Inc., an
affiliate of the Cleveland Clinic Foundation, of substantially all the assets of
Gemini. This sale was pursuant to an asset purchase agreement dated April 23,
2001, between Atlantic, Gemini, the Cleveland Clinic Foundation, and IFN, Inc.
On May 23, 2001, Atlantic filed with the SEC a Current Report on Form 8-K
stating that on May 21, 2001, Nasdaq advised Atlantic that Atlantic is in
compliance with the Marketplace Rules requirement that it have at least
$2,000,000 of net tangible assets or $500,000 net income.
22
SIGNATURES
In accordance with the requirements of the Exchange Act, Atlantic caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ATLANTIC TECHNOLOGY VENTURES, INC.
Date: August 20, 2001 /s/ Fredric P. Zotos
------------------------------
Frederic P. Zotos
President, Chief Executive Officer, and Director
Date: August 20, 2001 /s/ Nicholas J. Rossettos
------------------------------
Nicholas J. Rossettos
Chief Financial Officer
23